How the Hawke-Keating team unravelled over tax

THE beginning of the end of a beautiful friendship between prime minister Bob Hawke and treasurer Paul Keating in 1985 is revealed in cabinet documents released by the National Archives.

Cabinet strongly backed Mr Keating's tax reform centrepiece - a consumption tax - but Mr Hawke, although an initial supporter, baulked amid opposition from unions, the welfare lobby and business and pulled the rug from under his treasurer. It was John Howard, 15 years later, who was to introduce a GST.

Mr Hawke's popularity was still high in 1985. He had just won a second election but it was Mr Keating who did the government's heavy lifting. The treasurer drove economic reforms - cabinet approved strict budget controls, increased bank competition and eased controls on foreign investment - but tax reform was perhaps Mr Keating's strongest motivation.

On May 12, 1985, cabinet endorsed a draft white paper on options for tax reform. The paper recommended ''option C'' - a reduction in marginal income tax rates, to be offset by a broad-based consumption tax.

Two months later, Mr Hawke fulfilled an election promise by holding a national tax summit. On July 8, Mr Keating briefed cabinet on the

summit outcomes, noting that Mr Hawke had indicated in the final session that there seemed to be general support for a number of positions, including a 12.5 per cent consumption tax on services.

But on August 12 cabinet agreed that ''the Treasurer announce as soon as practicable that … the government would not consider further implementation of a tax on services''.

Behind closed doors, Mr Keating had lost the battle. It was, said then education minister Susan Ryan, the beginning of the end.

''Afterwards, there was a lot of unhappiness. I think you could say the outcome of the tax summit and the dropping of option C did start to lead to the divergence of views between Hawke and Keating,'' she said during an address to an audience at the National Archives last month.

''In many ways, as you know, they were a real power team but their views did diverge. I think you could trace the beginning of that divergence to the failure to proceed with option C.''

Mr Keating walked into Parliament on September 19 with a new tax package, suggesting that ''few of the people in the top bracket have paid the 60 cents in the dollar asked of them. They have arranged their affairs to evade, avoid or minimise that liability. Instead, their share of the burden has been carried by ordinary middle-income Australians.''

There was no consumption tax, but there were new taxes on fringe benefits and capital gains, wholesale tax was streamlined and a range of other measures were introduced.

But if tax reform proved to be thorny, the cabinet documents show that the Hawke government's honeymoon was starting to fade.

With widespread concern over nuclear tests in the South Pacific, the French government's sinking of the Greenpeace vessel Rainbow Warrior in New Zealand and the Lange government's ban on US warship visits to NZ, Mr Hawke had to somehow handle a commitment by the Fraser government to the Americans to allow MX missiles to land in Australian waters.

There were also sensitive espionage matters to deal with: Australian Security Intelligence Organisation officers threatened to strike over being transferred from Melbourne to Canberra, and cabinet disarmed the Australian Secret Intelligence Service and stopped them undertaking training exercises after officers made the service look foolish in a bungled ''dry run'' exercise in Melbourne's Sheraton Hotel.